Depository System: Meaning, Services and Constituents

In the early times, securities used to be in the form of physical certificates leading to settlement delays, forgery, theft, etc., which made the settlement system on the Indian Stock Exchange inefficient. To solve these issues, the Depository Act, 1996 was passed in India. The purpose of this Act was to ensure the free transferability of securities with security, accuracy, and speed. A depository is an organisation holding securities such as bonds, shares, debentures, etc., of the investors in electronic form. The depository holds these securities on the request of the investors through a registered Depository Participant. 

Important Facts about Depository

1. Besides Depository, the Depository system also includes the following three players:

• Depository Participant (DP): A depository agent through which it interfaces with the investors and provides depository services is known as Depository Participant (DP). A Depositor Participant acts as an agent or a link between the depository and the owner of securities. For example, ICICI Bank, HDFC Bank, PNB Bank, and various other private financial companies offer services as a Depository Participant.
• Beneficial Owner: The real owner of the securities who has lodged the securities with the depository in the form of book entry is known as a Beneficial Owner. A Beneficial Owner enjoys every right associated with the lodged securities. 
• Issuer: The company that has issued the securities is known as an Issuer. For example, Reliance Industries Ltd. is the issuer for shares issued by it. 

2. At present, two depositories are registered with SEBI; namely, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

3. Both depositories, NSDL and CDSL have a network of Depository Participants connected electronically to their clients. Therefore, the Depository Participants act as a link between depositories and the clients.

4. A Depository’s minimum net worth stipulated by SEBI is ₹100 crore. 

Services Provided by Depository

The services provided by a depository to the beneficial owner through a Depository Participant are as follows:

1. It provides the services of opening a Demat Account.

2. Converting physical securities into electronic form, also known as Dematerialisation.

3. Converting securities held in electronic form back into physical certificate form, also known as Rematerialisation. 

4. It also provides the services of maintaining records of the securities held by the beneficial owners in electronic form. 

5. Settlement of trades through delivery or receipt of securities from or in the beneficial owner’s account.

6. Pledging of dematerialized securities and facilitation of loans against shares.

7. Freezing of the Demat account for credits, debits, or both. 

Constituents of Depository System

A Depository System consists of The Depository and The Depository Participant.

1. The Depository

A Depository is an apex unit or organisation in the depository system. It is just like a Bank where the investors and depositors can deposit and withdraw securities or money. An investor can deposit or withdraw his shares in a depository. 

The features of the Depository are as follows:

• It is an institution that holds securities like debentures, shares, etc.
• A Depository offers the nomination facility of a Demat Account.
• It also issues receipt of bonus shares in electronic form.
• A Depository interacts with the investors with the help of an agent, also known as a Depository Participant (DP).
• The Depository Participants can offer the services only after they have obtained a certificate from SEBI.
• The investors have to open a depository account (known as a Demat Account) with any Depository Participant.
• A Depository can hypothecate dematerialised securities against a bank loan.
• With the help of the Depository Participants, a Depository can control the electronic transfer of securities and settlement of transactions. 

2. The Depository Participant

A Depository Participant is an agent of the Depository. While dealing with shares in electronic form, an investor does not have to interact with the Depository, but with the Depository Participant only. The guidelines of SEBI state that any financial institution (including share brokers, banks, etc.) can become a Depository Participant after registering themselves with SEBI. A DP is a crucial intermediary in the Depository System. Besides, all the buying and selling of shares under the Depository System takes place through the Depository Participant only.

Demutualisation

The separation of ownership and control of stock exchanges from the trading rights of members is known as Demutualisation. Earlier the ownership and control of stock exchanges were in the hands of a broker, which often led to a conflict of interest between the brokers and their clients. To solve this issue, Demutualisation of the Stock Exchange was done by the Government. 

Demutualisation has helped in two ways:

• First of all, it has reduced conflicts of interest between brokers and their clients.
• Secondly, it has reduced the chances of brokers using the stock exchange for their personal gain.